New Member Deposits Don’t Dilute Financials, Expert Says

One industry expert believes credit unions are capable of becoming a new member’s primary financial institution without negatively impacting the delivery costs of their products and services.

Several sources, including banking groups, have said that some of the 700,000 new members who joined credit unions on and around Bank Transfer Day, may have been formerly unprofitable bank customers.

“The bankers’ message referring to these members as unprofitable speaks volumes in my book,” said Brian Turner, director of advisory services at Catalyst Strategic Solutions, an investment subsidiary of Catalyst Corporate Federal Credit Union. “If not sour grapes, then it clearly demonstrates that bankers still don’t comprehend the fundamentals of consumer banking or their customers’ needs.”

Turner said profitability is an important element of any financial institution, particularly the safety and protection of equity capital. However, some bankers may believe that there is a natural conflict between the mandate that credit unions have to create member benefits from the services they provide and the fiduciary responsibility they have as a financial institution, he explained.

“Credit unions have clearly demonstrated their ability to provide lower loan rates and higher savings rates while delivering their products and services at a lower cost,” Turner said. “This structure helps credit unions to avoid the need to charge across-the-board fees for its services.”

As proof, noninterest income at credit unions account for less than 23% of total revenues, he pointed out. Citing a pre-Bank Transfer Day CUNA survey, Turner said the percentage of members choosing a credit union as their primary financial institution rose in 2011 to roughly 57% from 45%, a percentage that hovered in place for the past decade.

This brand loyalty helps to reduce margin delivery costs, savings which are returned to the member in the form of lower loans rates and higher savings rates, he noted.

“So, this is not an issue of the profitability of these new members. Even with low rates and declining marginal spreads, adding member deposits at this time can be achieved without harming the return profile of the institution or benefits to the membership,” Turner said.

Still, credit unions don’t have to be everything to everybody but they can be the best at five to 10 principal products and services that most of its members need, Turner suggested. This requires a complete assessment of member demographics as to best determine specific needs.

“Many credit unions look to the success of others and try to emulate products and services only to quickly find out that their membership is not interested,” Turner said.